The main findings of the study are that real exchange rate depreciations put expansionary effects on the output gap in Pakistan. The results also showed that movements towards a more floating exchange rate system also increased the output gap in Pakistan. For the overall significance of the model Wald test has been used. The results are given in table 3. It is found that all the variables are also significant altogether in the model. Are real exchange rate depreciations contractionary or expansionary? So for no agreement has been found in the empirical literature.Although the followers of the conventional theories (i.e. elasticties, absorption and Keynesian) claimed that real devaluation expands the output level. However, the recent evidences of the new structuralist empirics showed that real depreciation can results in the contraction of the output in an economy. The study has been conducted to analyze whether real depreciations put expansionary or contractionary effects on the output of Pakistan by using annual data over the period 1973-2008. For this purpose, positively significant which shows that a shift towards the more floating regime increased the ygt in Pakistan. The adjusted R2 value show that with the consideration for the regime shifts the R2 value increased (i.e. 0.78 > 0.70 > 0.45). The DW statistic value (2.46) shows that these results are reliable, which is also checked by using the post diagnostic tests i.e. Q-statistic, LM-test and the CUSUM stability test. For details see appendix. In sum, overall the results show that a rise in the qgt put expansionary effects on the ygt, supporting our contractionary hypothesis of the real depreciations. Also it is found that ygt is also dependent on the historical exchange rate systems followed by the State Bank of Pakistan during the study period. payday loan lender
A three version IS curve approach derived from the backward looking models of Ball has been used. The main findings of the study are that real exchange rate depreciations put expansionary effects on the output gap in Pakistan. The results also showed that movements towards a more floating exchange rate system also increased the output gap in Pakistan.